Forestar Group Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Dollar amounts below are in millions unless stated otherwise. Forestar operates real estate, mineral resources, and fiber resources businesses.
Financial performance and position
- Q3 revenue: $40.6, up 54.8% from $26.2 a year earlier. Nine-month revenue was $104.0, up 27.5% from $81.6.
- Profit: Q3 operating income was $4.8 versus $60.2 in Q3 2011; net loss attributable to Forestar was $0.7, or $0.02 per share, versus net income of $36.4, or $1.03 per share. For nine months, operating income was $17.0 versus $58.2, and attributable net income was $2.9, or $0.08 per share, versus $30.0, or $0.85 per share.
- Comparability: Q3 2011 included a $61.8 gain on sale of assets, principally from strategic timberland sales. 2012 gains included $10.2 on the sale of a Houston multifamily property; nine-month gains also included $11.7 on the sale of a venture interest and $3.4 on a Dallas-area land sale.
- Business segments: Q3 segment earnings were $12.7 for real estate, $6.1 for mineral resources, and $1.8 for fiber resources. Real estate benefited from property sales and increased lot activity; mineral results reflected lease bonuses and higher oil production; fiber results benefited from increased harvesting.
- Cash flow: Nine-month operating cash flow was negative $20.8, investing cash flow negative $95.6, and financing cash flow positive $108.4. Cash declined to $10.3 from $18.3 at year-end 2011. Investing outflow primarily reflected the Credo acquisition; financing inflows primarily reflected increased borrowings.
- Balance sheet and liquidity: At quarter-end, total assets were $889.9, debt $276.7, total liabilities $368.7, and shareholders’ equity $521.3. The amended credit facility had $170.4 of unused borrowing capacity; reported available liquidity was $176.2, against a $40.0 minimum requirement. The company reported compliance with debt covenants.
- Interest and financing costs: Q3 interest expense was $8.1, including a $4.4 loss on extinguishment of debt from the credit-facility amendment. Nine-month interest expense was $15.6.
Material changes versus the prior comparable period
- Forestar acquired all of CREDO Petroleum on September 28, 2012, for approximately $146.4 in equity consideration and repaid $8.8 of Credo debt. The acquisition was funded with approximately $105.0 of new facility borrowings and existing cash. Credo contributed no significant Q3 mineral-segment earnings because the transaction closed at quarter-end.
- The preliminary acquisition allocation included $139.9 of oil and gas properties and $56.0 of goodwill and other intangibles; the allocation remained subject to change.
- Real estate revenue rose to $27.1 in Q3 from $19.1, with 193 owned and consolidated residential lots sold versus 155. The company sold its 401-unit Houston multifamily property for $56.4; the buyer assumed $26.5 of debt.
- Mineral revenue increased to $10.5 from $5.9 in Q3, including $3.5 of lease bonuses. Fiber revenue rose to $3.0 from $1.3, with higher timber volumes and prices.
- General and administrative expense rose to $11.3 in Q3 from $2.8, including Credo transaction costs. Share-based compensation was a $6.3 expense versus $3.6 of income in Q3 2011, primarily reflecting the higher stock price and cash-settled awards.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management described signs of stability in single-family housing and stronger multifamily conditions, while noting continuing housing-market constraints, including weak employment, limited mortgage credit, and foreclosure competition.
- Management noted weaker oil prices and persistently low natural-gas prices, which may affect leasing, exploration, and royalty revenue. Timber sawtimber prices remained depressed, although pulpwood demand was steadier.
- Key risks include realizing Credo acquisition benefits and integrating its operations; oil and gas price, drilling, production, permitting, and environmental risks; real estate demand and development approvals; financing and covenant capacity; and the timing and approval of utility and improvement district reimbursements.
- Three unconsolidated variable-interest entities had $80.3 of liabilities, including $63.6 of current borrowings. Forestar’s estimated maximum exposure to loss was $34.4, compared with a $1.5 investment; refinancing or extension of their debt was not assured.
- Forestar reported $26.9 of outstanding performance bonds and letters of credit for ventures. It also reported $2.2 of estimated remaining remediation costs at a California site. Credo-related shareholder litigation included a proposed settlement subject to discovery and court approval; a separate dispute concerned Credo’s North Dakota lease interests.
- The company amended its senior credit facility, extending maturities and reducing the LIBOR spread to 4.0%, while raising the minimum interest coverage covenant to 1.50x. It paid $5.1 in amendment-related fees.
Important facts for investors to verify
- Final Credo purchase-price allocation, integration costs, acquired production and reserves, and whether the acquisition delivers expected returns.
- Post-acquisition debt, interest expense, borrowing-base availability, covenant headroom, and cash needs for development and drilling.
- Sustainability of real estate lot sales and mineral and timber results, separating recurring performance from asset-sale gains and lease bonuses.
- Collection timing and amounts for approved infrastructure reimbursements, and resolution or refinancing of venture debt and related guarantees.
- Progress and final outcomes of Credo-related litigation and environmental remediation obligations.